ACCOUNTING STANDARD INTERPRETATIONS

ASI 1 relevant to AS 16: Substantial period: Substantial period has not been defined under AS- 16, but has been explained in an accounting standard interpretation, ASI 1. It says a substantial period of time primarily depends on the facts and circumstances of the case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of each case. ASI 10 relevant to AS 16: Paragraph 4 (e) of AS 16 covers exchange differences on the amount of principal of the foreign currency borrowings to the extent of difference between interest on local currency borrowings and interest on foreign currency borrowings. For this purpose, the interest rate for the local currency borrowings should be considered as that rate at which the enterprise would have raised the borrowings locally had the enterprise not decided to raise the foreign currency borrowings. If the difference between the interest on local currency borrowings and the interest on foreign currency borrowings is equal to or more than the exchange difference on the amount of principal of the foreign currency borrowings, the entire amount of exchange difference is covered under paragraph 4 (e) of AS 16. Example- Arihant Industries Ltd has taken a loan of US$ 100,000 on 1st April, 2003, for a specific project at an interest rate of 5% per annum, payable annually. On 1st April, 2003, the exchange rate between the currencies was Rs. 45 per US $. The exchange rate, as at 31st March, 2004, is Rs. 48 per US $. The corresponding amount could have been borrowed by Arihant Industries Ltd in local currency at an interest rate of 11% per annum as on 1st April, 2003. The following computation would be made to determine the amount of borrowing costs for the purposes of paragraph 4(e) of AS-16: (a) Interest for the period = US $ 100,000 X 5% X Rs. 48 per US$ = Rs. 240,000 (b) Increase in the liability towards the principal amount = US$ 100,000 X (48 - 45) = Rs. 300,000 (c) Interest that would have resulted if the loan was taken in Indian currency = US$ 100,000 X 45 X 11% = Rs. 4,95,000 (d) Difference between interest on local currency borrowing and foreign currency borrowing = Rs. 4,90,000 - Rs. 2,40,000 = Rs. 2,55,000 Therefore, out of Rs. 3,00,000 increase in the liability towards principal amount, only Rs. 2,55,000 will be considered as the borrowing cost. Thus, total borrowing cost would be Rs. 4,95,000 being the aggregate of interest of Rs. 2,40,000 on foreign currency borrowings (covered by paragraph 4(a) of AS -16) plus the exchange difference to the extent of difference between interest on local currency borrowing and interest on foreign currency borrowing of Rs. 2,55,000. Thus, Rs. 4,95,000 would be considered as the borrowing cost to be accounted for as per AS-16 and the remaining Rs. 45,000 would be considered as the exchange difference to be accounted for as per AS-11 "The Effects of Changes in Foreign Exchange Rates". In the above example, if the interest rate on the local currency borrowings is assumed to be 13% instead of 11%, the entire exchange difference of Rs. 3,00,000 would be considered as borrowing

costs, since in that case the difference between the interest on local currency borrowings and foreign currency borrowings (i.e., Rs. 3,45,000 (Rs. 5,85,000 -Rs. 2,40,000)) is more than the exchange difference of Rs. 3,00,000. Therefore, in such a case, the total borrowing cost would be Rs. 5,40,000 (Rs. 2,40,000+Rs. 3,00,000) which would be accounted for under AS-16 and there would be no exchange difference to be accounted for under AS-11. ASI 12 relevant to AS 20: As per ASI 12 every company, which is required to give information under Part IV of Schedule VI to the Companies Act, 1956, should calculate and disclose earnings per share in accordance with AS 20, whether or not its equity shares or potential equity shares are listed on a recognised stock exchange in India. ASI 14 relevant to AS 9: Treatment of Excise Duty: As per ASI 14 the manner of disclosing excise duty in the Profit & Loss account is as under: Turnover (Gross) XX Less: Excise Duty X Turnover (Net) XX The above referred excise duty must be the total excise duty except the excise duty relating to the
difference between the closing stock and opening stock (i.e. Total Excise Duty minus excise duty on increase in stock = excise duty on goods SOLD during the year).

Excise duty relating to difference in opening & closing stock should be separately in the Profit & Loss Account. Explanatory note in Notes to account must explain the nature of both the excise duty amounts. ASI 29 relevant to AS 7: As per AS 7 the recognition of revenue may be inclusive of profit or exclusive of profit, depending upon whether the outcome of the construction contract can be estimated reliably or not. ASI 29 provides practical guidance for recognising contract revenue and costs as revenue and cost in the statement of Profit and Loss account. Here the distinction between revenue and turnover is relevant because the term Turnover is considered for certain purposes like applicability of Accounting Standards in relation to Small and Medium enterprises. Revenue is a wider term than turnover, as the term revenue as per AS 9 includes revenue from sales transactions, rendering of services and from the use by others of enterprise resources yielding interest, royalties and dividends. The term Turnover is used in relation to the principal revenue generating activity of the enterprise. In case of a contractor, the construction activity is its principal revenue generating activity. Hence, the revenue recognised (by whatever nomenclature described in the Financial Statement of a contractor as per AS 7 is considered as Turnover. ASI 30 relevant to AS 29:
As per ASI 30 an onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from it. Here unavoidable cost is the minimum net cost of exiting the contract.Net cost is the lower of: (a) Cost of fulfilling the contract or (b) Compensation or penalties arising from failure to fulfill the contract.

In respect of onerous contracts the signing of the contract (is the past obligating event) which gives rise to the present obligation. Besides this, when such a contract becomes onerous, an outflow of resources embodying economic benefits is probable. The amount of provision in respect of onerous contract measured by applying the provision of this AS and the amount must not be discounted. The above ASI has been issued as a consequence of limited revision to AS 29 to include onerous contract. The limited revision comes into effect in respect of accounting period commencing on or after 1st April 2006.